Cincinnati Financial on its expanded Skyline Re 2014 catastrophe bond

by Artemis on February 7, 2014

Cincinnati Financial Corporation, parent of Cincinnati Insurance Company the ceding insurer and sponsor of the recent Skyline Re Ltd. (Series 2014-1) catastrophe bond, has discussed the expanded reinsurance coverage its second cat bond provides.

During the Cincinnati Financial fourth-quarter 2013 earnings call, President and CEO Steve Johnston, discussed the January 1 renewal of Cincinnati Financial’s reinsurance program.

The firm increased its retention levels on its reinsurance treaties by $1m per loss, to $8m and Johnston said that this, alongside a more favourable rate environment, should reduce the cost of its reinsurance program while its property catastrophe treaty provides the same level of coverage as before.

The same is not true of the Skyline Re catastrophe bond renewal, which saw Cincinnati Financial expanding the coverage as well as the duration of the transaction, to take advantage of pricing to increase its protection. As its second catastrophe bond transaction, the Skyline Re 2014 cat bond saw Cincinnati Financial confirming its appreciation of the first deal in 2013 and looking to expand its use of collateralized reinsurance through cat bonds.

The first difference is in the size of the 2014 cat bond deal. Skyline Re 2014 completed at $100m in size, where as the 2013 transaction, Skyline Re Ltd. (Series 2013-1), was only $61.2m in size. The duration of the protection provided by the cat bond was also increased, from the one-year 2013 deal to a three-year 2014 cat bond maturing January 18th 2017.

Steve Johnston commented on the coverage provided by Skyline Re 2014; “The coverage applies to severe convective storm losses in selected areas as well as supplemental coverage in the event of an earthquake.”

Coverage has been expanded in the 2014 Skyline Re catastrophe bond in a number of ways. The earthquake coverage has been expanded by adding a number of additional states to the deal, so providing earthquake cover for more than just the New Madrid quake zone, which is where the 2013 cat bond was focused.

Johnston explained; “In addition to the coverage provided last year related to the New Madrid fault line, it includes several states in the Pacific Northwest.”

The coverage for severe convective storms (so thunderstorm, tornado and wind from convective storms as well as hail) was also expanded geographically. The 2013 Skyline Re cat bond had a county focused coverage approach, where as the 2014 deal expands to offer protection across full states.

Johnston elaborated; “For both coverages, convective storm and earthquake, the geography related to the coverage was expanded for 2014. The program now generally covers entire states where we have significant amounts of insured property risks instead of just selected counties.”

Finally, Johnston gave some detail on the indemnity trigger, a fact not revealed previously about the Skyline Re 2014 cat bond. As we wrote in our article announcing the Skyline Re 2014 cat bond a few weeks ago, the indemnity trigger provides cover on a per-occurrence basis for earthquake risks and annual aggregate for severe thunderstorm.

Johnston revealed on the call that the indemnity trigger sits at $160m, with each event having a $5m deductible.

Johnston said; “The storm aggregate coverage provides loss recovery once losses for all events in aggregate exceed $160 million after a $5 million deductible per event.”

Read much more about the Skyline Re Ltd. (Series 2014-1) catastrophe bond from Cincinnati Financial in the Artemis Deal Directory and in our article announcing the transaction in January.

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